Melbourne Australia d1
Melbourne Australia bay
Real estate

Market report: The outlook for 2025, by Jason Todd, chief investment officer of Commonwealth Private

Jason Todd, chief investment officer at Commonwealth Private, takes stock of geopolitical uncertainty and global economic trends to assess the outlook for Australian markets in 2025.

The global political backdrop

The first thing to say is that we should evaluate every change in leadership appropriately and with a degree of pragmatism. While the US election outcome is raising concerns about tariffs and trade wars, I think we should wait and see, because while there is definitely a little bit more uncertainty around US politics and the reaction from economic and trading partners, it’s likely that there will be some softening from what Trump campaigned on versus what will be implemented.

For instance, Trump campaigned on 60 per cent tariffs for China, but we think this is highly unlikely, and is a reference point for negotiation rather than retaliation. Instead, we expect President-elect Trump to focus on areas of strategic importance, such as technology, where there will be more efforts to protect domestic industries. In contrast, for lower-value consumer goods, tariffs will probably be much lower – around 20 per cent, rather than 60 per cent. In reality, we don’t know what the outcome will be, and while it does create uncertainty, it will probably be a long way from campaign rhetoric.

In addition, as a supporting factor, you’ve now got China stimulating. They’ve made it clear that they’re willing to be quite coordinated in terms of fiscal spending, monetary policy, and ultimately supporting their local governments. So there’s a bit of push and pull at play. While I’m cautious about extrapolating rhetoric into a very negative outcome, if I summarise it, there’s a slight tailwind from the potential extension of the 2018 tax cuts for US corporations and households, as well as a softer hand on regulation, while there is a slight headwind from higher prices due to tariffs.

Turning to the markets, I’d say the initial market reaction to the US election outcome was accurate. We saw an uptick in bond yields, indicating that the inflation will be a little bit higher. The currency also strengthened, which supports the notion of growing political uncertainty. Equities, on the whole, rallied strongly, but within equity markets, higher-beta and more cyclical areas – particularly those linked to the domestic economy – performed better than others. We also saw renewables and some of the trade-related stocks were sold off. This appears correct.

When observing how the markets are assessing current trends, it’s clear that volatility is likely to remain high. However, I also believe the markets have become better at navigating geopolitical and economic challenges. We’re in this period of elevated political uncertainty, but the markets have worked out how to isolate the risks much better than what we’ve seen in the past. For instance, when Russia invaded Ukraine, the oil price spiked, but then it came down quickly.

Similarly, we’ve had flare-ups in the Middle East which have driven oil price spikes, but they have also proved fleeting. I believe we live in a world where political uncertainty and geopolitics are very elevated, but markets are becoming much more adept at isolating these impacts.

There are two things to consider here. Firstly, Australia is politically aligned with the US but economically aligned with China. So, when US actions have an inflammatory effect on China, it can impact us economically. However, if we take a step back and break this down – considering the direct effects of what’s happening in the US, the implications for China, and then how it affects Australia – I don’t think it has significant consequences for the domestic economy or markets.

Secondly, from an economic stand-point, I actually think the situation could turn out to be quite positive for us. If the US does start to squeeze China with tariffs, and given that China is already supporting its domestic economy, Australian policy-makers may respond by increasing support as well. Since Australia is a major exporter to China, more stimulus in China could benefit us more than any US impact. Overall, while it may have some economic implications, I don’t believe it fundamentally changes the narrative for Australia.

We live in a world where political uncertainty and geopolitics are very elevated, but markets are becoming much more adept at isolating these impacts.

Domestically, we are still grappling with our own inflation and economic slowdown concerns, as we haven’t eased policy yet. As a result, I expect the country’s performance to lag behind the rest of the world. We’re already seeing this with the US economy proving to be much stronger than anyone would have thought prior to the increase in policy rate. However, despite lagging the trend in the developed world (including the decline in inflation), Australia is likely to be pulled along by global trends, but shallow downturns mean shallow upswings, so Australia will continue to chart an anaemic path compared to other regions.

Turning points are always difficult to navigate for investors, whether it be in equities, bonds or other key asset classes, and it’s not yet clear that a new trend or turning point has truly been established and fully embedded in the markets. So there is still a lot of uncertainty – not politically, but just around the idea of, ‘Have we seen the lows yet? Are we now starting to pick up? Are we now on a real policy-easing cycle that supports growth?’

Firstly, there’s been some volatility in the markets. Before the election, there was a lack of clear direction here in Australia, and you don’t see the trend re-established until the economic trend itself takes shape. Secondly, from a portfolio-creation perspective, the expectations around portfolio returns over the past 13 to 14 years since the Global Financial Crisis, where equities have been a significant contributor to risk assets and wealth creation, are not typical.

Thirdly, new investment opportunities are developing due to these larger structural trends. This means bond yields will likely be a bit higher than we’ve seen before, and banks pulling back from some areas of lending is allowing private credit to re-establish itself. From the perspective of high-net-worth individuals and wealth creation, while overall returns are coming down, we are seeing differentiation in asset classes that were previously dragged down – such as low bond yields and private credit, which weren’t delivering those types of returns before. So, there is that aspect to consider.

There are still significant opportunities within our wealth creation portfolio, as well as substantially attractive structural thematics that people might want to continue to invest in – whether it’s AI, areas of technology, and energy transition.

Lastly, people with a wealth-creation perspective shouldn’t fear what I believe is just a return to normal. No-one should fear an environment where equity returns are slightly lower, fixed income is slightly higher and private equity remains largely the same, while private credit is a little higher. The key point is that the volatility around these returns is greater, meaning risk-adjusted returns are coming down a bit. But I do think that we’re just graduating to a more normalised return. There are still significant opportunities within our wealth creation portfolio, as well as substantially attractive structural thematics that people might want to continue to invest in – whether it’s AI, areas of technology, and energy transition. The investment universe is still there for people to actually think about. 

One other thing is that many people focus on an approach and outlook that often frames it in terms of, ‘What’s your view on equities?’ If equities are going down, they assume you’re bearish. But the reality is, we place clients in diversified portfolios because while some assets are performing well, others may not be. It’s important to emphasise to clients that there are always opportunities. If we become slightly more negative on equities, bond yields might rise, or alternative assets like Bitcoin or commodities could be performing well. When I speak with many people, I find that the overall sentiment around how they want to invest is often driven by their view on the direction of equity markets. This is the benefit that we have in terms of the dispersion of the assets that we consider.

The two-speed recovery in Australian luxury real estate

Real estate is interest rate sensitive. And in a falling interest-rate environment – which is where we’re heading now – it gets a bit of tailwind. We have to break these things down because there are various components of real estate, including retail, commercial and industrial. Some of them have stronger tailwinds, while some of them do not. Now, for the residential side of it – particularly luxury retail as well – rates are not going to be discounted quite as much as compared to other properties, because we’ve had very strong migration in most parts of the economy. For industrials, on the other hand, you’ve got all the structural thematic, including logistics and warehousing. We’re also starting to see a pickup in office and commercial, which was previously weak due to people working from home. So you have these very different dynamics driving the overall property side of things. 

It’s almost a natural evolution in how things are moving. There is still very strong demand for high-quality properties, whether residential or retail. The demand for A-grade assets is through the roof, while the demand for B- and C-grade is declining. This trend is similar in the residential and luxury property markets in Australia, where demand remains strong and unlikely to diminish.

Risk appetites and values-driven investments

Australia has been very similar to the rest of the world, like Singapore and Asia. We thought that the economy has slowed down over the last two to three years, but it didn’t, because clients are coming into wealth channels and have been investing. I don’t feel there’s a big ‘risk-on’ shift in the market just yet. There’s plenty of client demand, but it’s going into more balanced investment options. People are cautious, and while we’re seeing more interest in cyclical, riskier value areas, it still depends on when the RBA provides more clarity on interest-rate cuts. In Australia, value and small-cap sectors remain underperforming compared to large caps.

In terms of how the demand for more environmentally or socially conscious types of investment has gone, I again think that what’s happened is that after Covid, everyone got very optimistic around this type of investment. But then we saw the oil price go through the moon in 2022 and all the ESG funds went under before, so everyone backed off them. I get a sense that the enthusiasm is not quite there. What I do believe is happening though, is that we get the sense that there are a lot more very directed type investments in this space. So they don’t come to us and say, ‘I want an ESG portfolio’, but rather, ‘Well, there’s an energy transition fund. I want to get some of that, but I can balance it.’ 

Inflation, globally, in developed and emerging markets, is still continuing to fall, and policy rates are now well into an easing cycle. And so those are the key thematics that set a view in 2025, where we think that there will still be quite a good investment environment and things will gradually get better.

While there’s political uncertainty, I don’t believe it changes the key things for how investors should be thinking about the backdrop. Inflation, globally, in developed and emerging markets, is still continuing to fall, and policy rates are now well into an easing cycle. And so those are the key thematics that set a view in 2025, where we think that there will still be quite a good investment environment and things will gradually get better. For Australia, the one complicating factor is that the cycle is a little bit delayed versus the rest of the world, but the Reserve Bank of Australia  will eventually catch up and start to cut rates, and it will still be quite a good investment environment.

I have a very pragmatic approach towards valuations, which has generated a big constraint on investors. But when policy rates are falling, valuations don’t stop people from investing in risk assets. Even if the market is above average, people still invest, but just accept slightly lower returns. I believe that the current environment – where earnings and growth are picking up, and capital costs are falling – is favourable for risk assets. While returns may be slower moving forward, average returns are still good, and this is where we’re heading as we return to a more normal environment.

Read next:

— Latest listings —